We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Azarga Uranium (TSE:AZZ) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let’s start with an examination of the business’s cash, relative to its cash burn.
How Long Is Azarga Uranium’s Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2019, Azarga Uranium had US$344k in cash, and was debt-free. Looking at the last year, the company burnt through US$3.2m. That means it had a cash runway of under two months as of September 2019. To be frank we are alarmed by how short that cash runway is! The image below shows how its cash balance has been changing over the last few years.
How Is Azarga Uranium’s Cash Burn Changing Over Time?
Azarga Uranium didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 9.2% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Azarga Uranium To Raise More Cash For Growth?
Since its cash burn is increasing (albeit only slightly), Azarga Uranium shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
Azarga Uranium’s cash burn of US$3.2m is about 10% of its US$30m market capitalisation. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Azarga Uranium’s Cash Burn A Worry?
On this analysis of Azarga Uranium’s cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we’d be watching like a hawk for any deterioration. When you don’t have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Azarga Uranium insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
Of course Azarga Uranium may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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